Borrowing and Buying Property with your SMSF
While you may be familiar with accumulating property outside of super and benefiting from gearing strategies, you can also gear property within your Self-Managed Super Fund.
Benefits of gearing property within an SMSF
Accelerated wealth accumulation potential through borrowing via this higher risk strategy.
Greater flexibility – SMSF’s can better tailor investments to suit member needs.
Investment returns will accumulate in a concessionally taxed superannuation environment.
Capital Gains Tax can be minimised or eliminated under certain conditions.
There may be long-term benefits for small business owners to hold business premises within their SMSF.
The potential to utilise traditional negative gearing strategies to generate tax-effective income.
Protection from creditors in certain circumstances under Bankruptcy Laws.
Understanding SMSF Loans
It is important to understand that
SMSF Loans are different to normal home loans due to the superannuation legislation that they are linked to. The structure, process and tax implications of such a strategy can be complex and it is important you understand the costs and benefits to your personal situation before proceeding. How does the strategy work?
Superannuation fund trustees are able to borrow money in order to purchase an investment asset provided the borrowing meets certain strict conditions. Where an SMSF borrows under these rules, it will need to ensure that the borrowing meets the requirements outlined under superannuation law. Broadly, in order for a borrowing strategy to meet the superannuation requirements, the following must apply:
The SMSF trustee(s) enters into a loan arrangement and must use the borrowed funds to purchase an asset.
The asset must be held by a custodian on trust for the SMSF. Under this arrangement, the SMSF will hold the beneficial ownership of the asset.
The SMSF must have a right (but not an obligation) to acquire the legal title to the asset from the custodian by making one or more instalment payments.
The lenders’ rights against the SMSF must be limited to the rights relating to the underlying asset.
The following diagram illustrates a basic SMSF loan borrowing arrangement, where monies are borrowed from a lender (a bank or a related party) and are used to acquire an asset in the name of a security trustee under a bare trust arrangement where the fund beneficially owns the asset.
SMSF Loan Borrowing Arrangement
Blueprint Wealth provides a comprehensive approach to helping you set up and run your SMSF. We pride ourselves on delivering a complete SMSF package to you for every service that you will need to run a successful SMSF.
Contact us to book an initial consultation with one of our advisors.